First Property, go for an Equity Play?

[Grant Anderson]

Hello all! I've been looking to use my FHA loan on a first property and house hack. I have great credit and could probably muster 30-40k for a down-payment. However in my area, pure cash flow projections per unit are below what other people on this forum and Brandon Turner in Multifamily Millionaire Vol1 (great book btw) are saying. This being said, there is high demand to rent in my area and I'm confident in the fundamentals for long term stability here. I've come up with a possible strategy and line of thinking to excuse a less-than-par cashflowing property, especially a first-bat, but I need help spotting any potential reasons this would blow up in my face:

Instead of trying to find maximizing cash flow properties, I should find a property in high demand (low vacancy) and high rents that will cover the expenses. These markets are typically more "appreciation" markets (one I just happen to live in). Although the payments are higher and the fat is slimmer, I have a larger pot of equity to draw from after year one to leverage and get another property via HELOC. For example:

I have a choice between two hypothetical properties...

Property A - 2 units, priced $300k, $3000 gross monthly rent, $1365 P&I, $200 pure cash flow every month. After one year, the equity that was paid down in the property is $16,386. Available leverage at 80% = $13,108

Property B - 4 units, priced $500k, $4800 gross monthly rent, $2276 P&I, $200 pure cash flow every month. After one year, the equity that was paid down in the property is $27,310. Available leverage at 80% = $21,847

Although pure cash flow is the same, leverageable equity is higher. With this higher amount I can go secure another property. Bonus points if I've gained any value-add equity.

Part of me says playing around with debt like this is dangerous, another part says this is "good debt" and all your doing is leveraging equity you've earned in your property. Cash flow is all well and good but if you're trying to put <10% down on a property, I just don't see how cash flow like that'll work in the first couple years. The only thing I could see coming is Debt-To-Income ratios stopping me in my tracks.

What could possibly go wrong here that I'm not seeing? Would love insights of the masters (or other rookies)!

Many thanks,

Your friend Grant